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Trust and Vulnerability

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  • Christopher Bidner

    ()
    (School of Economics, The University of New South Wales)

  • Ken Jackson

    ()
    (Department of Economics, Wilfried Laurier University)

Abstract

By facilitating mutually beneficial transactions, trust is a crucial ingredient for economic development. We explore the determinants of trust by studying a model in which agents rely on imperfectly enforceable contracts to support cooperation in a prisoners’ dilemma production game. We show how a fundamental relationship between vulnerability and trust emerges when players observe private signals of the strength of contract enforceability, even in the limit as signal noise vanishes. In uncovering this relationship, the model demonstrates the importance of social institutions in the development process. We show stronger social institutions, by reducing vulnerability, increase equilibrium trust, promote the use of superior technologies, and interact with formal legal institutions.

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File URL: http://research.economics.unsw.edu.au/RePEc/papers/2012-09.pdf
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Bibliographic Info

Paper provided by School of Economics, The University of New South Wales in its series Discussion Papers with number 2012-09.

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Length: 22 pages
Date of creation: Oct 2011
Date of revision:
Handle: RePEc:swe:wpaper:2012-09

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Related research

Keywords: trust; global games; institutions; social protection.;

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References

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  1. Francois, P. & Zabojnik, J., 2003. "Trust, Social Capital and Economic Development," Discussion Paper 2003-116, Tilburg University, Center for Economic Research.
  2. Hans Carlsson & Eric van Damme, 1993. "Global Games and Equilibrium Selection," Levine's Working Paper Archive 122247000000001088, David K. Levine.
  3. Bidner, Chris & Francois, Patrick, 2009. "Cultivating Trust: Norms, Institutions and the Implications of Scale," Economics working papers patrick_francois-2009-66, Vancouver School of Economics, revised 02 Dec 2009.
  4. Gustavsson, Magnus & Jordahl, Henrik, 2006. "Inequality and Trust in Sweden: Some Inequalities are More Harmful than Others," Working Paper Series 673, Research Institute of Industrial Economics.
  5. Guido Tabellini, 2008. "The Scope of Cooperation: Values and Incentives," The Quarterly Journal of Economics, MIT Press, vol. 123(3), pages 905-950, August.
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  8. Laura Schechter, 2005. "Traditional trust measurement and the risk confound: An experiment in rural paraguay," Artefactual Field Experiments 00106, The Field Experiments Website.
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  10. Breuer, Janice Boucher & McDermott, John, 2012. "Culture, caution, and trust," Journal of Development Economics, Elsevier, vol. 97(1), pages 15-23.
  11. Alesina, Alberto F & La Ferrara, Eliana, 2000. "Who Trusts Others?," CEPR Discussion Papers 2646, C.E.P.R. Discussion Papers.
  12. Nunn, Nathan, 2007. "Relationship-Specificity, Incomplete Contracts, and the Pattern of Trade," Scholarly Articles 4686801, Harvard University Department of Economics.
  13. Christian Bjørnskov, 2007. "Determinants of generalized trust: A cross-country comparison," Public Choice, Springer, vol. 130(1), pages 1-21, January.
  14. Greif, Avner, 1994. "Cultural Beliefs and the Organization of Society: A Historical and Theoretical Reflection on Collectivist and Individualist Societies," Journal of Political Economy, University of Chicago Press, vol. 102(5), pages 912-50, October.
  15. Andreas Bergh & Christian Bjørnskov, 2011. "Historical Trust Levels Predict the Current Size of the Welfare State," Kyklos, Wiley Blackwell, vol. 64(1), pages 1-19, 02.
  16. Andrei A. Levchenko, 2007. "Institutional Quality and International Trade," Review of Economic Studies, Oxford University Press, vol. 74(3), pages 791-819.
  17. Bond, Philip & Rai, Ashok S., 2009. "Borrower runs," Journal of Development Economics, Elsevier, vol. 88(2), pages 185-191, March.
  18. Sylvain Chassang, 2010. "Fear of Miscoordination and the Robustness of Cooperation in Dynamic Global Games With Exit," Econometrica, Econometric Society, vol. 78(3), pages 973-1006, 05.
  19. Zak, Paul J & Knack, Stephen, 2001. "Trust and Growth," Economic Journal, Royal Economic Society, vol. 111(470), pages 295-321, April.
  20. Avinash Dixit, 2003. "Trade Expansion and Contract Enforcement," Journal of Political Economy, University of Chicago Press, vol. 111(6), pages 1293-1317, December.
  21. Chassang, Sylvain & Miquel, Gerard Padró i, 2009. "Economic Shocks and Civil War," International Quarterly Journal of Political Science, now publishers, vol. 4(3), pages 211-228, October.
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